Where did the token rewards go?

Original author: FLORIAN STRAUF

##Original compilation: Frost, BlockBeats

Editor's note: Where do the airdrop or staking rewards go? Perhaps most people have not thought about this issue carefully. As an important part of the blockchain industry, token incentive plans are being widely adopted, but there are not many articles on the market analyzing the incentive effects. Is such an incentive mechanism really effective? This article analyzes the token reward mechanism. BlockBeats compiled the original text as follows:

Someone asked me this question recently: "How do recipients of token rewards handle tokens?"

If we Looking at Jupiter’s recent $JUP airdrops, the answer is that most are selling.

Reward recipients have two options: sell or hold.

After in-depth analysis, it was found that the risk appetite of individuals holding tokens creates uncertainty between selling or holding. Generally speaking, cryptocurrency startups carry significant risks, which leads to a certain threshold when deciding how much money to allocate to the project. If incentives exceed this threshold and there is insufficient incentive to hold, selling may ultimately be the option. Therefore, when assessing an individual's acceptance of risk, potential benefits as well as the sustainability of the project need to be taken into account in order to make an informed decision.

Why reward?

Rewards are a powerful tool that token sponsors have at hand. There is no cost to mint the tokens, and you can earn a profit by selling them.

Projects receive free funds and can incentivize others (liquidity providers, users, etc.) to interact with the protocol. Doing so steers the market and subsidizes buyers and sellers to drive business.

The initiators may hope that over time, the number of buyers and sellers will allow the market to continue to operate organically without Internet funding.

There is no doubt that free tokens are a great tool. Almost every project that launches a token uses it for incentives. But the question is, how effective are these incentives?

Is this effective?

Staking rewards are a form of incentive. In its original form, staking was a mechanism in which a proof-of-stake base layer paid minted internet currency to validators.

However, non-base layers have adopted this strategy to pay token holders to retain users. Currently, it is a popular mechanism for many protocol implementations.

If we talk about staking rewards from non-base layers, the goal is usually customer retention, i.e. people are rewarded for holding tokens.

Can token reward activities retain token holders?

I compared the yield paid by $GMX to the yield on corporate bonds. Most people are unlikely to hold a risky asset like $GMX with a yield as low as 3-4%. They will do things like buy low and sell high because they see the potential in the project.

In this case, I think the token reward activity cannot retain holders, or has a very small effect.

Average Customer Retention Rate

Token holders and customers are not the same, but there is some overlap.

We can use rewards as a cost to retain customers or token holders. It is similar to dividends as a mechanism to retain shareholders (except that dividends are not paid in kind)

Similarly, airdrops can be viewed as a customer acquisition cost. Unfortunately, there isn’t a lot of data on the effectiveness of staking rewards, but there are some great examples of airdrops.

For example, 7% of airdrop recipients still held $UNI at some point after the airdrop. This somewhat matches Jupiter’s airdrop campaign above.

Kerman Kohli analyzed the customer acquisition cost of Looksrare airdrop in detail, please refer to this article for details.

Although airdrops and staking are not exactly comparable, they both show poorer user retention for reward campaigns, so I think the two are roughly the same in terms of results.

Incidentally. This is Jupiter’s airdrop:

##Dune: https://dune.com/jhackworth/jupiter-airdropDune

Comparison (source):

Supply meets demand

The bad thing is that projects not only cost money, but also tokens to acquire customers. Many of these coins will eventually become selling pressure in the market.

If they do not find buyers who can withstand the selling pressure, the token price may fall, thus weakening the incentives and possibly creating the following cycle.

What I am trying to say is that token incentives are helpful, but they may not be as effective as people think, and when the circulation of tokens is larger, people There needs to be a strong reason to buy and hold. If users will do this, then it should have generous actual benefits, governance rights, token buyback and other mechanisms, or be a project with stable growth.

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